November 2011 Archive for Dairy Talk

At Dairy Today’s Elite Producer Business Conference, we asked Scott Brown from the Food and Agricultural Policy Institute to talk about ethanol’s impact on feed prices. If his analysis is to be believed, you’ll hardly notice any change if ethanol's tax credits are removed.

With ethanol’s volumetric tax credit of 45¢/gal. set to expire at the end of December, dairy producers might expect more than $1/bu. drop in corn prices.

After all, each bushel of corn produces three gallons of ethanol, right? Think again.

Earlier this month at Dairy Today’s Elite Producer Business Conference, we asked Scott Brown from the Food and Agricultural Policy Institute (FAPRI) to talk about ethanol’s impact on feed prices.

If his analysis, and that of the U.S. Congressional Budget Office (CBO) and Iowa State University are to be believed, you’ll hardly notice any change at all.

For one thing, the tax credit is just one appendage of the three-headed ethanol monster: the credit, tariff protection and ethanol usage mandates.

Plus, there are some 200 ethanol plants across the country which now consume 5 billion bushels of corn. “Ethanol infrastructure will not go away even if we eliminate ethanol policy,” says Brown.

Estimates of ethanol policy’s impact on corn prices break down like this:

·CBO: 50¢ to 80¢/bu.

·Iowa State: 59¢/bu.

·FAPRI: 53¢/bu.--with just 2¢ of that coming from the ethanol credit and 11¢ coming from ethanol tariffs. FAPRI also estimates ethanol policy adds just 54¢/bu. to the price of soybeans, $7.87/ton to the price of soybean meal and $3.63/ton to the price of distillers dry grains.

“As a result, you won’t see a huge change in corn and feed prices when the tax credit goes away,” says Brown.

Why not? For one thing, world feed demand has not abated even at these historically high prices. Even with $6/bu. corn, U.S. exports are still 2 billion bushels, or 16% to 17% of the crop. One out of four bushels of soybeans is also being exported.

Eliminating tariffs also won’t help. Brazilian ethanol prices, driven by high world sugar prices, are now higher than U.S. prices. In 2010/2011, the U.S. was thus able to net export some 660 million gallons of ethanol, says Brown.

Ethanol mandated usage is also still on the upswing. In 2011, ethanol production was nearly 13 billion gallons. It is expected to top out at 15 billion gallons by 2015.

Not surprisingly, Brown didn’t convince everyone in our audience of 400 that taking away the ethanol credit won’t have much, if any, impact on feed prices.

We had about two dozen producers write comments on their evaluations of Brown’s presentation. About a third simply didn’t believe him. Typical of these skeptics: “Bull--Ethanol is the reason Feed is High;” “Informative—maybe misguided;” and (my favorite) “WOW! Is this guy paid by ethanol producers?”

But the neat part of this is that we’ll soon know whether Brown—or the skeptics—are right. It’s highly likely the ethanol credit will expire at the end of the year. If it does, we’ll know how big a roll the credit plays in feed prices.

My guess: Brown, CBO and Iowa State will be right. Then again, I hope I’m wrong.

The new analysis of the Dairy Security Act of 2011 (DSA) by the University of Wisconsin and Cal Poly San Luis Obispo should serve as a wake-up call for everyone involved in the dairy policy debate.

Opponents of DSA, which embodies the reforms of the National Milk Producers Federation (NMPF) Foundation for the Future plan, point to the analysis as proof positive enacting the plan will be an unmitigated disaster. Conversely, National Milk dismisses the study, saying it’s driven by assumptions that do not reflect the real world.

I come down in the middle. Rational minds need to take a hard look at the study, because it offers some chilling outcomes:

• The U.S. all-milk price could be reduced by 92¢/cwt.

• The supply management program could be triggered 40% to 45% of the time.

• Cumulative net farm operating income could be lowered 32% to 48%.

• By farm size, the analysis projects stunning losses: 24% for participating farms with less than 250 cows; 61% for farms with 250 to 499 cows; 44% for farms with 500 to 1,999 cows, and 34% for farms with more than 2,000.

NMPF dismisses the study. “We don’t think it reflects what will happen in the real world,” says Jim Tillison, NMPF senior vice president for marketing and research.

He says if you apply the proposed dairy reform to the previous five years, the market stabilization program would have been in place just 9% of the time. In addition, Tillison says the Congressional Budget Office (CBO) projected the proposed dairy reforms would generate 20% government budget savings and leave producers better off. CBO also projected 60% of dairy farmers would participate in the margin protection and market stabilization programs, far higher than the 5% and even 50% levels Nicholson and Stephenson assumed.

To their credit, the authors of the analysis, Chuck Nicholson, Cal Poly, and Mark Stephenson, Wisconsin, acknowledge the study does not account for costs associated with current high levels of price volatility.

“It is important to note that the current volatility [of markets] imposes costs on farms and can result in substantial equity loss and a higher probability of business failure,” they say. “These costs and risks are not directly included in our analysis, so it is not possible to conclude on the basis of reduced average net farm operating income that dairy farmers would be worse off under the proposed legislation.”

Stephenson adds the model cannot be used to forecast future milk prices. “But if you look at the past four or five years, the model has correctly predicted the downturns in time if not the magnitude,” he says.

Consequently, I don’t think it would be wise or prudent to simply dismiss this analysis. NMPF’s contention that the supply management/market stabilization would have been in play just five or six months between 2006 and 2010 also is suspect. Once you intervene in a market, you change the dynamics of that market moving forward in time.

At the same time, having just 50% producer participation in the margin protection/market stabilization, as the Cal Poly/Wisconsin model assumes, is also suspect. In reality, I think Rep. Collin Peterson (D-Minn.) who authored DSA, has it right. Lenders will require their highly leveraged dairy borrowers to participate in order to get the “free” margin protection.

Large farms are more highly leveraged than small farms. As a result, I think it is fair to assume more than 50% of the country’s milk production will enroll in the program. And that alone will change the dynamics of the model.

Producers and dairy economists have to take a very hard, critical look at this dairy reform package. But they also must realize that Oct. 1, 2012, which ends the current Farm Bill, starts a whole new era as well. The status quo will no longer be the status quo.

Many have argued that dairy policy should not be written simply to avoid the debacle of 2009. But no producer I know wants to relive 2009 ever again. To me, that’s a pretty good place to start.